Revisiting the guns-butter tradeoff: a wavelet analysis of the US and Britain

Abstract

This study applies continuous wavelet analysis to examine defense-education and defense-healthcare relations in the US and Britain. It discovers four empirical patterns that have not been shown in the existing literature. First, the defense-welfare tradeoff rarely occurs at cycles less than 6 years and hence is not a short-run phenomenon. Second, very noticeable bilateral tradeoffs between education and defense can be detected. The effect, however, is more pronounced in the direction from education to defense. Third, the defense-welfare tradeoff is much less likely to occur in defense-healthcare relations than defense-education relations. Fourth, a structural change in the defense-healthcare relationship occurred during the 1960s, after which the defense-healthcare connection became primarily complementary. Together, the established patterns question the assumption that the defense sector has a dominant power in budget allocation. They also raise new theoretical and empirical questions demanding future research efforts.